MyECheck, Inc. (fka MYEC)

[Taurus69]

$myec From Securities Regulation Daily, July 21, 2016

No private cause of action found under Securities Act 17(a)

By Kevin Kulling, J.D.

Confirming that a private cause of action does not exist under Section 17(a) of the Securities Act, a federal court in Seattle has dismissed claims against an auditor that allegedly filed financial statements severely understating the number of outstanding shares of a company it audited. At the same time, the court dismissed all remaining claims for pleading deficiencies involving material misrepresentations, scienter, and loss causation (Maciora v. PMB Helin Donovan, LLP, July 20, 2016, Martinez, R.).

MyECheck audit. PMB Helin Donovan LLP was retained to audit the financial statements of a company called MyECheck. After PMB performed its audit, MyECheck filed its Form 10 reports and financial statements with the SEC.

However, in August 2015, a former board member of MyECheck informed PMB about alleged accounting errors contained in the financial statements. Those errors included the understating of the number of shares outstanding by hundreds of millions.

Allegations against PMB. Kenneth Maciora brought an action against PMB, alleging that he purchased 66,666,666 shares of MyECheck from Rod Zalunardo, a former employee of MyECheck. In October 2015, Maciora contacted PMB and requested that they amend the Form 10 that was filed with the SEC to reflect Zalunardo’s ownership of MyECheck shares.

Maciora alleged that PMB violated Securities Act Section 17, Exchange Act Section 10A, and aided and abetted MyECheck’s violation of several other provisions.

No private cause of action. PMB argued that it was well settled that there was no private cause of action under Securities Act Section 17(a), Exchange Act Section 10A, and certain aiding and abetting claims.

The court agreed and said that the case law was clear in the Ninth Circuit that there is no private cause of action under Section 17(a) of the Securities Act. Cases cited by Maciora had been overruled, the court said. The court also said that there was no private cause of action for aiding and abetting violations of Section 10b or Rule 10b-5. The court also declined to create a private cause of action under Section 10A as urged by the plaintiff, agreeing with the defendants that the plain language of the statute indicated a clear intent to preclude a private cause of action.

Pleading deficiencies. In reviewing Maciora’s allegations under Rule 10b-5, the court concluded that the complaint failed to plead with particularity facts that demonstrated PMB made any materially false statement with the intent to defraud and that Maciora relied on the statement, resulting in damage.

PMB argued that Maciora’s amended complaint indicated that he bought the shares at issue prior to confronting PMB and demanding that the SEC filings be amended. He also did not plead any facts specifying how he was misled by the financial statements, according to PMB.

Holding. The court said that the complaint lacked sufficient particularity as required by the PSLRA and Rule 9(b).The complaint failed to plead a material misrepresentation or omission of fact communicated to Maciora by PMB in connection with the purchase of shares, according to the court. The court also determined that the pleadings lacked an adequate allegation of scienter, causation or economic loss.

The court said that the facts as alleged show that Maciora bought shares in spite of, rather than because of, the alleged misrepresentations of defendants. He bought former employee Zalunardo’s shares without any representations by PMB, according to the court. Only after purchasing the shares did he contact PMB to demand that his newly purchased shares be recognized.

The claims were dismissed with prejudice and the court denied Maciora’s motion for leave to file a second amended complaint, finding that the lack of a material misrepresentation or omission and lack of causation could not be remedied by amendment without directly contradicting the existing pleadings.

The case is No. 2:16-cv-00295.

Attorneys: Kenneth Maciora, pro se. Philip B. Grennan (Wood, Smith, Henning & Berman LLP) for PMB Helin Donovan LLP.

Companies: PMB Helin Donovan LLP